When you’re dealing with a whole life insurance policy, whether it be a normal whole life insurance policy or a whole life policy designed for cash value accumulation, there are a few values that you may want to look at. The guaranteed values and the non-guaranteed values. And you may be wondering what’s the difference between the two.
Assuming you purchased a life insurance policy with a mutually owned life insurance company, you’re going to have guaranteed values and non-guaranteed values listed on any policy illustration.
Basically, the guaranteed values are the worst-case scenario. How is this policy going to perform if there are no dividends credited toward that policy?
You see when you’re looking at a policy illustration, there generally are two columns. One column for the guaranteed values and one for the non-guaranteed values. The guaranteed values assume no dividends are ever paid in any year. The non-guaranteed values assume that dividends are paid at their current rates prospectively into the future. When you’re looking at those non-guaranteed values, the only thing that we can guarantee is that those numbers are not going to be what you actually experience.
You see, that stands true for the guaranteed and the non-guaranteed values in most cases with these mutually owned companies because as soon as a dividend is credited towards your policy, the guaranteed values change. The only non-guaranteed dividends are those that haven’t been credited yet. Once that policy dividend is credited, it’s set in stone. However, next year’s dividend is not. That’s to be determined.
You see these illustrations show you the worst case scenario and a scenario projected going forward, and the scenario projected going forward based on today’s dividend scale. However, neither of those values is actually accurate. You see, dividends could be better in the future, they can be worse in the future. Meaning that they don’t necessarily have to declare and pay a dividend.
However, the companies that we recommend have been paying dividends for a minimum of 125 consecutive years. They’ve paid dividends through world wars, recessions, and depressions. The assets of the life insurance industry actually grew during the Great Depression. So as bad as things got, the life insurance companies were a rock during stormy times.
One of the reasons why we love these whole life insurance policies so much is because they’re actuarially designed to get better and better every year. They’re not dependent on the stock market or other economic factors. They depend on the well-being and the profitability of the insurance company.
There are three things that are going to determine the performance of your policy.
Number one, the insurance company has to assume that people die. That’s assumed mortality. Insurance companies are really good at overestimating the cost or how many people are going to die. If there’s a saving on the mortality costs, meaning people die later rather than sooner, that money gets to be used or transferred over to the dividend account.
Similarly, the insurance company assumes what it’s going to cost to administer the policy. Again, they usually overestimate what it’s going to cost. And any savings are transferred over to the dividend account.
Lastly, the insurance company needs to put that money to work. All of those savings get put to work or invested into various asset classes and they use the interest rate that they earn on that money to further build the dividend account.
In conclusion, those illustrations that you see, can and will change. One thing that is for sure, though, is that after you have cash value credited to your policy, you can’t lose that money.
If you’d like to get started with the whole life insurance policy designed for cash value accumulation, schedule your free Strategy Session today or check out exactly how we put this to work for our clients and watch our free web course, The Four Steps to Financial Freedom.
And remember, it’s not how much money you make. It’s how much money you keep that really matters.